Dealing With the Perils and Pitfalls of Sudden Wealth

"As Baby Boomers begin to realize their inheritances, we're about to see the greatest transfer of wealth in American history."
-- Tom Clapp, Chief Investment Officer
First Investment Advisors

(Source: First Union Corporation press release March 12, 2001)

Frank stared at the check for a long time. It was made out to him and it was for more money than he had ever hoped to see at one time. Still, his first reaction was to send it back to the insurance company; he didn't want it. His second reaction was to buy Wendy a big diamond ring for their twenty-fifth anniversary. Instead, he put the check in his sock drawer and didn't say a word about the money to anyone for a month.
(This and other stories in this article came from interviews over several years.)

What would you do if a check showed up one day for $100,000? You might want to give that question some serious thought. Over the next 20 years, report Emily Card and Adam Miller, authors of Managing Your Inheritance (Time Books, 1997), millions of Americans stand to receive, on average, between $90,000 and $130,000 each. You could be among that group. No, it's not the lottery or the ability to pick hot stocks on Wall Street. It's your inheritance, a gift from your parents or grandparents.

Today's super seniors, age 75 plus, are the richest generation in history. Not bad for a group that survived the Great Depression, won World War II and then went on to build the United States into the most affluent country on earth. Along the way, they amassed between $8 trillion and $11 trillion of their own...and they're planning to pass much of it on to the next generations.

The problemMany people are unprepared to receive this money. Part of it has to do with contemporary attitudes towards money. Most of us today, unlike the generation that grew up in the 1930s and 40s, are more inclined to spend than save. "Unlike their frugal parents," say Card and Miller, "boomers have exhibited the lowest savings rate in recent history." They've also "amassed the highest debt in history."

Plus, it's difficult to remain objective over one's inheritance. Since the money is directly related to the death of a loved one, there's often a conflicting mixture of guilt and elation. "On one hand, I experienced a euphoric rush," said one man. "Suddenly, I could pay off bills, put a little aside, get off the financial treadmill. On the other, my mother had to die for me to receive the money."

The consequences can be disastrous, whether the amount is a few thousand dollars or several million. When it comes to "windfall" money, points out entrepreneur Robert T. Kiyosaki, author of Rich Dad Poor Dad (Warner Books, 1998), many people "don't know what to do with it." He stresses that the money is often mismanaged or spent without planning. As a result, it's not uncommon for an entire inheritance to vanish within a year or two.

Card and Miller talk about a client who received $125,000, went on a cruise, redid the kitchen and living room and generally lived it up. Three months later, there was $35,000 left. He was one of the lucky ones. Many people actually end up financially worse off than before, as they use their new-found wealth as a down payment on more and more luxuries, or spend it three times over, ending up deep in debt.

What should you do if you are in line for an inheritance? Here are some suggestions from Card and Miller, starting with steps you can take while your parents are still alive:

Set up a dialogue with family members. If you are in line for an inheritance from your parents, see if they are receptive to discussing their plans and any concerns you may have. This helps take the surprise factor out of the inheritance. Besides, it is much easier to address important issues when all parties are available.

Discuss financial tools to help distribute assets, reduce taxes, and preserve capital. These may include making lifetime gifts, establishing a power of attorney and using trusts.

Respect their wishes. Remember, it's their money. One 89-year-old man instructed his son to manage his inheritance as he saw fit and to use gifting to reduce the estate. "Other than that," recalls the son, "the only strict rule was that Dad wanted to keep $600,000 in his own name during his lifetime."

Express your own concerns. When Rod's father died, his mother began to date again and even talked about marriage. Rod was concerned about his own inheritance passing to his mother's new husband. After several conversations, thought she never did marry, the mother set up trusts to protect her family's inheritance.

Educate yourself about the estate planning process. The more you know going in, the better able you will be to preserve your inherited wealth.

Plan ahead. Know how you will utilize and allocate your inheritance. That way, when the money arrives, you will be ready.

Have reliable advisors in place. Bring your attorney and financial professionals in to discuss your options and help work out plans.

The key is awareness and preparation. If you understand the perils, pitfalls and opportunities you face regarding your inheritance, you will be better prepared to utilize those assets wisely.